Does the Source of Foreign Direct Investment Matter to Economic Growth in Malaysia?

Abstract

Foreign direct investment (FDI) is often viewed as a potential contributor to a country’s economic growth and development. However, the extent of the contribution may depend upon the source of such investment inflows. This paper assesses the contribution of inward FDI to Malaysia’s economic growth using investment data disaggregated by source over the period, 2008:Q1–2016:Q3. Due to the mixed orders of integration of the series involved, the autoregressive distributed lag (ARDL) framework is employed to conduct the assessment. The econometric results indicate that the source of the FDI does matter greatly when considering the extent of its spin-off for the local economy. Specifically, FDI flows from North America and Southeast Asia contribute more significantly to Malaysia’s economic growth than FDI flows from Central and South America, Northeast Asia and Oceania.

Key Words:

• Causality
• cointegration
• economic growth
• generalised variance decomposition
• regional inward FDI

JEL Classification:

• C32

Acknowledgements

We would like to greatly thank the two anonymous reviewers for their valuable comments and suggestions that have contributed significantly to the quality of this paper. Any remaining errors and weaknesses are solely ours.

ORCID

Chor Foon Tang http://orcid.org/0000-0003-2242-9222

Notes

1 It is important to clarify here that cointegration is a purely statistical concept and the application of cointegration test for long run relationship is not merely for studies with a long data span. Maddala and Kim (1998) emphasised that the presence of cointegrating relationship depends purely on the statistical properties of the series. Therefore, although the time span of this study is relatively short (i.e. about 8 years), it is still relevant to test for the existence of long run relationships among the variables under review using a cointegration test.

2 Lapan and Bardhan (1973) documented that firms in the host country can successfully benefit from technology transfer via inward FDI only if they have reached a certain level of absorptive capacity. Hence our findings of non-Granger causality of inward FDI from Europe to Malaysia’s economic growth could be due to the channelling of European capital to businesses and sectors with low levels of absorptive capacity. Azman-Saini et al. (2010) and Girma (2005) also emphasised the need for firms (countries) to reach a certain threshold level of absorptive capacity before they could enjoy the positive impact of inward FDI on productivity growth.